Test Bank Docx Accounting Info Theory & Uses Chapter 4

Chapter 4

Multiple Choice

1. Which of the following research approaches emphasizes going from the specific to the general?
   1. Deductive
   2. Behavioral
   3. Inductive
   4. Pragmatic
2. Which of the following research approaches is based on the concept of utility or usefulness?
   1. Deductive
   2. Behavioral
   3. Inductive
   4. Pragmatic
3. Which of the following research approaches is attributed to DR Scott?
   1. Deductive
   2. Ethical
   3. Inductive
   4. Pragmatic
4. Which of the following outcomes of providing accounting information is an attempt to identify individual securities that are mispriced by reviewing all available financial information?
   • • • 1. Agency theory
         2. Efficient markets
         3. Fundamental analysis
         4. Capital asset pricing model
5. Which of the following outcomes of providing accounting information is an attempt to deal with both risks and returns?
   • • • 1. Agency theory
         2. Efficient markets
         3. Fundamental analysis
         4. Capital asset pricing model
6. Which of the following outcomes of providing accounting information is based on the supply and demand model?
   • • • 1. Agency theory
         2. Efficient markets
         3. Fundamental analysis
         4. Capital asset pricing model
7. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as knowledge of past security prices?
   • • • 1. Weak
         2. Semi-weak
         3. Semi-strong
         4. Strong
8. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as all publicly available information including past stock prices?
   • • • 1. Weak
         2. Semi-weak
         3. Semi-strong
         4. Strong
9. The efficient market hypothesis holds that that financial markets price assets at their intrinsic worth, given all available information. Which of the following forms of the efficient market hypothesis defines all available information as information, including security price trends, publicly available information, and insider information?
   • • • 1. Weak
         2. Semi-weak
         3. Semi-strong
         4. Strong
10. Which of the following anomalies are related to particular time periods?
    • • • 1. Calendar anomalies
          2. Value anomalies
          3. Technical anomalies
          4. Other anomalies
11. Which of the following anomalies are related to strategies designed to outperform the market?
    • • • 1. Calendar anomalies
          2. Value anomalies
          3. Technical anomalies
          4. Other anomalies
12. Which of the following anomalies are related to investing techniques that attempt to forecast security prices by studying past prices and other related statistics?
    • • • 1. Calendar anomalies
          2. Value anomalies
          3. Technical anomalies
          4. Other anomalies
13. Which of the following cognitive biases in finance suggests that the majority of people perceive a dividend dollar differently from a capital gains dollar?

Mental accounting

Biased expectations

Reference dependence

Representativeness heuristic:

1. Which of the following cognitive biases in finance suggests that people tend to be overconfident in their predictions of the future

a. Mental accounting

b. Biased expectations

c. Reference dependence

d. Representativeness heuristic:

1. Which of the following cognitive biases in finance suggests that people tend to judge Event A to be more probable than Event B when A appears more representative than B.

a. Mental accounting

b. Biased expectations

c. Reference dependence

d. Representativeness heuristic

• • • • 1. Agency theory
        2. Efficient markets
        3. Fundamental analysis
        4. Capital asset pricing model

1. Which of the following is not viewed as a cost to the principal in an agency relationship?
   1. Monitoring expenditures by the principal
   2. Monitoring expenditures by the agent
   3. Bonding expenditures by the agent
   4. The residual loss

18. What theory on the outcomes of providing accounting information attempts to assess an individual’s ability to use information?

• • • • 1. Agency theory
        2. Efficient markets
        3. Human information processing
        4. Capital asset pricing model

1. Which of the following is not a conclusion that has been drawn from human information processing research?
   1. An individual’s perception of information is quite selective. That is, since individuals are capable of comprehending only a small part of their environment, their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive.
   2. Since individuals make decisions on the basis of a small part of the total information available, they do not have the capacity to make optimal decisions
   3. Individuals are able to process and integrate large amounts of information simultaneously
   4. Since individuals are incapable of integrating a great deal of information, they process information in a sequential fashion.

20. What theory on the outcomes of providing accounting information rejects the view that knowledge of accounting is grounded in objective principles

• • • • 1. Agency theory
        2. Critical perspective
        3. Fundamental analysis
        4. Capital asset pricing model

Essay

1. Briefly describe the following research approaches:
   • • • 1. Deductive
         2. Inductive
         3. Scientific method
2. Identify and state the problem to be studied.
3. State the hypotheses to be tested.
4. Collect the data that seem necessary for testing the hypotheses.
5. Analyze and evaluate the data in relation to the hypotheses.
6. Draw a tentative conclusion.
7. What is fundamental analysis and what is its goal?
8. Describe the efficient market hypothesis and its three forms.
9. According to finance theory, a financial market anomaly occurs when the performance of a stock or a group of stocks deviates from the assumptions of the efficient market hypothesis. Katz has classified anomalies into four basic types.
   1. What are these four types of anomalies?
   2. Give examples of each.
      • • 1. The four types of anomalies identified by Katz are calendar anomalies, value (fundamental) anomalies, technical anomalies, and other anomalies.
10. Kahneman and Tversky studied how people manage risk and uncertainty and developed a theory to describe it they termed prospect theory. Discuss the characteristics of prospect theory.
11. Define the following cognitive biases:
    1. Mental accounting:
    2. Biased expectations:
    3. Reference dependence:
    4. Representativeness heuristic:
12. Discuss the capital asset pricing model including the concepts of unsystematic risk, systematic risk and beta.
13. Discuss the difference between normative and positive accounting theory.
14. What is the basic assumption of agency theory? Why is the relationship between shareholders and management an agency relationship?
15. Agency relationships involve costs to the principals. Discuss these costs. Give some examples of each of these costs.
16. What is the goal of human information processing studies? What are the general findings of these studies and what is the implication for accounting?
17. An individual’s perception of information is quite selective. That is, since individuals are capable of comprehending only a small part of their environment, their anticipation of what they expect to perceive about a particular situation will determine to a large extent what they do perceive.
18. Since individuals make decisions on the basis of a small part of the total information available, they do not have the capacity to make optimal decisions.
19. Since individuals are incapable of integrating a great deal of information, they process information in a sequential fashion.
20. Discuss the concept of critical perspectives research in accounting.
21. In their book, “The End of Accounting and the Path Forward for Investors and Managers,” Baruch Lev and Feng Gu maintain that flaws in generally accepted accounting principles severely limit the usefulness of financial reporting. What are the three major reasons the authors indicate why accounting reports have lost relevance? What is their solution to this perceived problem?
22. Discuss the relationship among research, education, and practice in accounting.

Research is necessary for effective theory development. In most professional disciplines, when research indicates that a preferable method has been found to handle a particular situation, the new method is taught to students, who then implement the method as they enter their profession. Simply stated, research results in education that influences practice.

The accounting profession has been criticized for not following this model. In fact, prior to the FASB’s development of the conceptual framework, research and normative theory had little impact on accounting education. During this previous period, students were taught current accounting practice as the desired state of affairs, and theoretically preferred methods were rarely discussed in accounting classrooms. As a result, the use of historical cost accounting received little criticism from accounting educators since it was the accepted method of practice, even though it has little relevance to current decision making.